7 Ways to Get the Lowest Conventional Loan Rates

A conventional mortgage is a common loan offered by most lenders and can be an excellent way to finance your home. It’s perfect for borrowers with strong credit profiles and a decent-sized down payment. Because it isn’t backed by a government agency like FHA or VA loans, conventional loans have stricter requirements. But it’s not impossible to qualify.

According to a Consumer Financial Protection Bureau report, conventional loans were used for nearly 65% of home purchases in 2023. But remember, even with a great credit score, you’re not guaranteed to get the lowest conventional mortgage rates.

Here’s the thing, interest rates vary from lender to lender. And with the right strategy, you can get a lower rate on your conventional mortgage. We want you to understand how interest rates work and your role in lowering your rates. Here’s how:

1. CHOOSE BETWEEN A FIXED RATE AND AN ARM

Conventional loans come with two interest rate options: fixed-rate and adjustable-rate mortgages (ARM). The right one depends on your situation and home-buying goals.

Here's what you need to know:

Fixed rates

Fixed rates remain the same for the life of the loan. Because there’s no fluctuation in interest, your monthly payment stays the same, which makes it easier to budget your house payment. Fixed rates are sometimes higher than ARM rates because lenders take risks when locking in a rate for the entire term of your mortgage. If interest rates go up, you get to keep your fixed rate.

Adjustable-rate mortgage

An adjustable-rate mortgage, as the name suggests, has an adjusting rate. But for the first few years, you get a fixed rate, called an introductory rate. Once the initial period ends, your rate will usually adjust according to current market rates after one to ten years. Interest can go up or down depending on market conditions. It can change at set intervals, such as once every year or once every three years.

Please note we no longer offer ARMs at Good News Lending.  We are happy to help with your fixed rate mortgage needs, however.  As always, shoot us a message to discuss your personal situation or if you have any questions.  

Fixed Rate vs Adjustable-Rate Mortgages

Choosing between a fixed rate and ARM is a big decision. Think about your long-term plans. Is this your ‘forever home’ or just a temporary residence? If it’s your long-term home, you may consider a fixed rate. That way, you don’t have to worry about interest rate fluctuations that could cause your payment to increase beyond what you can afford. But for a temporary or shorter-term residence? Taking advantage of the low introductory rates of an ARM could leave a lot more money in your pocket.  

2. DOES PAYING POINTS MAKE SENSE?

When you take out a conventional mortgage, you can lower your interest rate by paying for discount points. Although it could lower your monthly payments, it’s optional. You can buy points or not. It’s up to you.

If you buy points, you can lock in a lower interest rate on your conventional mortgage. How much lower depends on the lender, loan term, and current interest rates. Mortgage rates fluctuate daily, so a lot is riding on the decision.

You might pay points if you want a lower interest rate and mortgage payment on your conventional mortgage. Paying one point can save you 0.25% on your interest rate.

But remember, there’s no set amount on how much a discount point will reduce the rate. Whether this makes sense depends on your circumstances.  

First, think about how long you’ll be in the home and calculate how long it will take to make up the points' cost based on the rate savings. Buying points isn’t one-size-fits-all. But when you look at both options, you’ll know if it's the right choice for your conventional mortgage.

3. BEWARE OF CLOSING COSTS

Understanding what costs to expect when buying a home with a conventional mortgage can help you know how much to save to buy a home. Part of the expense is closing costs.

Generally, closing costs range between 3% and 5% of the loan amount. That means, on a $220,000 home, you pay $6,600 to $11,000. Remember that closing costs are an extra expense on top of the down payment you need for the mortgage.

Origination fee 

The origination fee is also known as the underwriting, processing, or administrative fee. It covers the cost of document preparation and notary fees.

Application fee

Lenders charge an application fee to process your paperwork, run credit checks, and cover administrative expenses.

Prepaid interest 

This covers the interest that accrues on the mortgage after the closing date but before your first payment is due. It will vary based on your loan amount and interest rate.

Discount points 

If you pay discount points to lock in a lower interest rate, you'll find point fees included in your closing costs. Remember, discount points are optional.

Mortgage Insurance

You may pay for mortgage insurance if your down payment is less than 20%. The amount can vary because some lenders require you to pay the first year's premiums in advance, while others ask for a monthly payment.

Appraisal

Before you take out a loan, lenders must know how much the property is worth. That way, they can make sure the value is at least as much as the amount you want to borrow.

Title Search

Title companies must search the home's history of ownership to ensure the seller has a legal right to sell the property. Title searches cost an average of $200 to $500.

Title insurance

Lenders can require title insurance to protect them from legal damages if a mistake in the title search comes up after you own the property. Owner’s title insurance is also an option and can protect you from title problems, but it isn’t required.

Home inspection

A home inspection may be optional, although some lenders require a home inspection prior to issuing a mortgage. It’s also in your best interest to pay for a home inspection to ensure the home is in good condition and free of major defects. Home inspections can range from $300 to $500.

Property taxes

You may pay a portion of the city and county property taxes as part of your closing costs.

Annual assessments This can include fees to your condo or homeowners association. You may have to pay it upfront.

Homeowners Insurance 

Lenders generally require you to pay for insurance before closing. The cost depends on where you live, your home's value and the insurance company you choose.

Most of the expense falls on the buyer. But there’s another option:

When you submit an offer or negotiate terms, you can ask the seller to pitch in to cover some (or all) of the closing costs. When applying for a conventional loan, your lender will list your closing costs in the Loan Estimate. This way, you’ll know immediately what expenses you might have to pay. They’ll also be listed in the Closing Disclosure when you close the loan.

4. SELECT THE PERFECT DOWN PAYMENT

Conventional loans typically require a 20% down payment, but you can get a conventional mortgage with as little as 3% down. Paying 20% down can save you money in the long run because you won’t need to purchase mortgage insurance. But the bigger question is, should you double down on your down payment to save on interest fees?

While every situation is different, there are a few things you can consider. For instance, lenders can offer lower interest rates with higher down payment amounts. It can also save you money on interest fees. Investing more money now will reduce your principal balance; a lower principal balance means you pay fewer interest fees. And that can mean more significant savings over the life of the loan.  

Doubling down on your down payment can also maximize your equity in your new home.

Comparing 3 percent, 10 percent, and 20 percent affects a loan payment and interest rate

But you don't want to "over-invest," either. If you don't have money saved for an emergency, you may want to limit how much you put down on the house. That way, you'll have cash on hand if the air conditioner stops working, you lose your job, or have another unexpected setback.

The more money you put down on the home, the more you could save on interest fees. But if making the larger down payment will put you in financial distress, it’s often not worth it.

5. SHORTEN THE LENGTH OF YOUR LOAN

Shortening the length of your conventional loan can lead to a lower interest rate. This is because longer mortgage terms mean a higher risk for the lender. There's more time for something to happen that causes you to default on the loan. And more risk means higher interest rates.

That means 30-year conventional loans usually have higher interest rates than a 10- or 15-year term. Plus, you save a substantial amount in interest fees over the life of the mortgage because you pay the loan off in less time when you choose a shorter term. But a word of caution:

Before you take on a 10- or 15-year term, remember that the payment amount will be higher because you have less time to pay it off.  

30 Year vs 15 Year Payment

A 30-year mortgage on a $220,000 house with an interest rate of 3.50% will have a monthly payment of $988.

But if you get a 15-year mortgage?  Your payment jumps up to $1,573.

Shortening your loan length is a great way to lower your conventional mortgage interest rate and save more on your home loan.

But it increases your monthly obligation.

So, consider the monthly payment amount to see how it will fit into your budget before committing to a specific loan term.

6. COMPARE LENDERS

Comparing lenders might be the most crucial step to getting the lowest conventional mortgage rate. All lenders are not equal. While they use the same conventional loan guidelines, lenders will charge different interest rates.

When you compare lenders, you see what rates are available and can make the best choice.

An insider tip: make sure you’re comparing “apples to apples” when you look at conventional loan mortgage rates side by side.

For example, don’t compare a 15-year loan to a 30-year loan or a fixed interest rate to an ARM.

And remember that your mortgage fees include more than your interest rate. Closing costs are an essential consideration, too. Just like interest rates, closing costs can vary by lender.

If looking at an especially big purchase, consider a jumbo loan. The best way to compare conventional mortgage offers is to look at the bottom line.

Ask yourself what the loan will cost over its term, including interest and closing costs. What impact would a 'worst-case scenario rate' have on my monthly payments if I choose an ARM instead of a fixed rate?

7. LENDER CREDIT HACK

You've probably heard about paying points to reduce your interest rate and lower your mortgage payment. "Lender credits" work the same way but in reverse. You pay a higher interest rate, and the lender gives you money at closing (which you can use to offset closing costs).

When To Use Lender Credits

Say you can easily afford your monthly mortgage payment, but you're not too comfortable parting with all the down payment you've saved.  The lender credit can go toward closing costs such as:

• Appraisal fees 
• Title insurance 
• Mortgage insurance – Paying down your mortgage insurance (or PMI) can lead to significantly reduced monthly payments and may allow you to qualify for a bigger loan
• Origination fees
• Property taxes
• Homeowners Insurance 

These can easily add up to thousands of dollars!

If you don't want to part with all of your hard-earned down payment, speak to a mortgage professional about a lender credit.